An interesting conversation I had last week reiterated an important lesson in my life, which was that it’s okay to have opposing views on different timeframes as long as you clearly articulate those seperate views.

The conversation started when I peeked at the Finviz futures screen and uttered the phrase “I think bonds are setting up nicely on the short side.”

My friend’s response was “What? You’re bearish on bonds? Anytime someone talks about rates you say that they’re going lower. All you ever talk about is bond yields going lower, and now you’re bullish rates? What gives? You can’t just change your tune all of a sudden.”

Okay, that was a bit of an exaggeration, his response was more along the lines of “meh” or “pffft”, followed by “what’re we ordering for lunch?”, but nonetheless it brought to light an important topic of which the bond market is a great example of right now.

Long term I continue to think that current market conditions point to lower rates. I’m a keep it simple kind of guy, and rates beiing in a roughly 30 year downtrend suggests that this trend is not going to stop on a dime.

fredgraphIn terms of catalysts, Fed Fund Futures continue to push out the probability of a rate hike to late 2015 and into 2016. For some perspective, the probability of a rate hike in October was up near 85% earlier in the year, but is now down to under 50%. Market participants continue to suggest lower rates are here to stay.

fed fund futuresWithin that context, two charts suggested to me that bonds were due for some downside over the short term.

1. The ten year bond yield was finding some support at the October capitulation low.

2. TLT failed to get back above the 2012 highs and 61.8% Fibonacci retracement of the January-March decline.

tnxDespite my long term outlook on rates, this tactical trade appealed to me for two reasons.

1. The risk/reward on a move toward the 200 day was between 6:1 & 10:1 depending on the entry.

2. Risk was clearly defined and I was comfortable with the estimated probability of success.

The bottom line: What seemed to be a huge contradiction on my part turned out to be a misunderstanding of timeframes. My process calls for finding the best risk/reward setups regardless of the biases I have on a higher, or lower timeframe. Yours may not.

At the end of the day, words do mean things and we’re all guilty of assuming people know exactly what we mean, at some point or another, without our underlying message being clearly defined to the audience. Hopefully this post will reiterate the importance of developing a clearly articulted message to myself and to others, especially in the world of finance.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.


The Contradiction That Wasn’t